Month: February 2018

Federico is an early bitcoin adopter, co-founder at Chainside and consultant for blockchain implementations. In December 2014, he founded the Italian branch of the BEN (Blockchain Education Network) with the aim of spreading the network in the Italian Universities.

Q: First of all, I would like to thank you for taking part in this episode of the ESCP Finance Society’s “Breakfast with” agenda. How did it come to your mind to deepen your knowledge about Bitcoin in 2015? What did your classmates think about it at the time?

Actually the first time I learned about Bitcoin was in 2011, when I was still in high school, but even if I found the concept very interesting at the time I didn’t get passionate about it. Later, in 2013, I finally started studying it, trying to trade it and start with my first projects around Bitcoin. While at university I had many classmates that showed some interest in the topic, but just few decided to try to learn more about it or buy some coins.

Q: What is Chainside and what is your long-term plan?

Chainside’s goal is to make easier the interaction with the blockchain for enterprises, reducing technical barriers with a simple interface that abstracts the complexities of Bitcoin. Right now we are focused on bitcoin payment solutions for merchants, but since differently from some other competitors we built our own technology from scratch, we are able to enable new blockchain use cases according the customers demand. In the long-term, we aim to establish ourself as a leading company in the industry and facilitate the transition to a crypto-based economy.

Q: Why should a firm choose Bitcoin over fiat money? What are the advantages of the former over the latter?

Bitcoin presents multiple advantages, both for people using it as a medium of exchange and for those using it as store of value. A firm accepting Bitcoin payments can benefits from the absence of charge-back related frauds as the settlements of a Bitcoin transaction is some order of magnitude faster than any traditional payment system (just about 10 minutes). Moreover, thanks to its permission-less nature, Bitcoin makes possible financial interaction also with people who do not have access to traditional financial infrastructure, or people who care about their financial privacy and prefer to use a tool not controlled by any centralised entity, increasing the potential customers of a company. Bitcoin has also the advantage to be programmable money, making innovation and automation more effective.

On the other hand, enterprises looking for a superior store of value for them or for their customers will find in Bitcoin an asset with limited and deterministic supply backed by frozen energy, somewhat similar to gold but technically more advanced.

Q: Do you actually believe that Bitcoin is an expression of financial world’s democratization (given that 97% of Bitcoins is held by 4% of the addresses)?

I don’t think that the distribution of wealth is really related to financial democratization. Bitcoin is an expression of permission-less finance, meaning that anybody in the world can have access to advance financial tools without having to deal with the limitations imposed by local regulation. This means that under a financial perspective, people in developed countries won’t be as advantaged as they are today over people in developing countries with poor banking infrastructure.

Q: As of 4 February 2018, the number of existing cryptocurrencies is over 1,512 and still growing. Who will thrive in such a market in the long term and what is the competitive advantage of Bitcoin over the other cryptocurrencies?

Most of those cryptocurrencies out there are already to be considered dead, only few of them actually have a decent transaction volume. In general, I am expecting a consolidation in the coming years, if you think about that the purpose of money is to be the single intermediate good that everybody uses for trading, so with the exception of transition phases when better money substitutes inferior money, people will always converge on using a single currency. This means that there is no space for multiple cryptocurrency in the long term, and the market will converge on the best one, which at the moment seems to be Bitcoin as it has the more stable and battle tested technology and a stronger network effect. Some cryptos claim that their purpose is not to be a currency but something else (e.g. a world computer), so they are not in competition with Bitcoin, but the truth is that they still need a native currency to secure their blockchain, so they will suffer competition anyway.

Q: Do you think it is possible to apply financial theoretical concepts to Bitcoin and cryptocurrencies in general? For example, is it possible to identify the fundamentals of a crypto? If yes, please explain how.

There are fundamentals in crypto, as there is an utility that people consume while using cryptos. When you want to evaluate a cryptocurrency you have to ask yourself “do people have any benefit in using it” and “is it long term sustainable”, which also implies how scalability concerns are being addressed. Bitcoin has already proved to be a good store of value and a useful medium of exchange for a least some niches, and current protocol upgrade proposals create optimism about the future, while most other cryptos are in a phase where they still have to prove themselves to provide some kind of real value to the users and have long term sustainability.

Q: Different investors use different methods to analyse an asset before investing in it. Which method should an investor in Bitcoin use? And if you have ever invested in it, which one did you use?

I studied the technology and tried to see the potential and the limitations. I know it can be hard for people without a technical background to really understand how the technology works, but if you don’t make some effort to study it as much as you can, it becomes very easy to make very expensive mistakes when it comes to investment. Understanding the tech helps you to see what the long term trend can be, while for the short term I consider any kind of trading mostly gambling, so it can be fun but there is no much you can do to systematically outperform the market.

Q: Warren Buffett in an interview to CNBC said: ”I can say almost with certainty that cryptocurrencies will come to a bad end.” In your opinion, are we witnessing the burst of the bubble or a healthy correction?

I believe that corrections are a natural part of a price discovery process, so as an asset gains popularity it is to be expected to have both bull market and bear market phases. The fundamental value of the technology is growing with new protocol upgrades being proposed every week, so I consider the daily price fluctuation just a distraction.

Q: Last question, what is the most important piece of advice you can give to the ESCP students that would like to pursue a career in Fintech industry? What are the most important qualities to succeed?

You need to be willing to go out of your comfort zone and start studying stuff you know nothing about on your own, you can’t be successful in Fintech if you don’t know how the technology works under the woods. You also have to deal with the fact that the university cannot help you in any relevant way to be prepared for the industry, it is a fast changing environment and few people are knowledgeable about these topics, and they usually don’t teach in universities. The good news is that nowadays there is so much information freely available on the Internet, so you can easily learn a lot alone, but it requires commitment and genuine interest.

It has been a pleasure to host you at our “Coffee Break”. Thanks again for your time and patience, Mr. Tenga!

Private equity (PE) has gained a great amount of influence in today’s financial marketplace, but only few people actually understand the ins and outs of the industry.

This quick article (less than “360” seconds long!) breaks down the topic, discussing in brief (i) the different types of PE strategies; (ii) the main PE firms out there and (iii) the current momentum of the industry.

First things first. What is a PE firm?

To make an (extremely) long story short, PE Firms are essentially asset-management companies (AMC) advising, managing and investing investor’s money through registered investment vehicles called “funds”, each having a different investment scope. AMCs need to comprise skilled and trustworthy Investment Professionals able to raise capital and attract investors promising in exchange solid and constant returns.

PE investments range from listed and non-listed companies to physical assets (i.e. real estate), offering returns much less correlated to indexes than the returns available in classic public market investment opportunities. However, the tradeoff is that these investments are illiquid (i.e. 3-7 years to generate attractive returns) and thus require longer investment periods.

PE Firms can invest in a wide mix of private investment strategies, with the mix varying greatly from firm to firm depending on the firm’s size, stated strategy, geographical scope, industry and transaction expertise. There are many different types and sizes of PE firms / Funds specialised in either a specific industry or a specific geography.

7 PE strategies – The key elements

Here are the main PE strategies everyone should be aware of:Venture capital (VC) – startups and young companies / little to no track record of VC investments are made with the goal of generating outsized returns by identifying and investing in the most promising companies and profiting from a successful exit (the most desired being an IPO)

Growth capital – mature companies / proven business models / looking for capital to restructure their operations, enter new markets or finance an acquisition. Typically, these are minority investments in more mature companies than for a VC scope

Buyouts – mature companies / generating significant and steady cash flows. PE firms make buyout investments when they believe that they can extract value by holding and managing a company for a period of time and exiting the company after significant value has been created. This strategy typically involves debt (i.e. usually above 50% of the total acquisition value) to finance the acquisition, enabling the PE Firm to generate high returns while only risking a small amount of capital

Fund of Funds (FoF) – investments are made in PE funds rather than directly in the equity of companies. By investing in a fund of funds, investors are granted diversification and the ability to hedge their risk by investing in various fund strategies

Debt/Mezzanine – consists of both debt and equity financing to support a company’s Companies that take on mezzanine financing must have an established product and reputation in the industry, a history of profitability, and a viable expansion plan. A key reason of why a company may prefer mezzanine financing, is that it allows it to receive the capital injection needed for business without having to give up a lot of equity ownership

Special situations & Distressed funds – target companies that need restructuring, turnaround, or are in any other unusual circumstances. Investments typically profit from a change in the company’s valuation as a result of the special situation. (i.e. company spin-off, tender offers, bankruptcy proceedings…). Besides PE Firms, Hedge Funds also implement this type of investment

The main players – American legends vs. European firms

Henry Kravis (KKR), Steve Schwarzman (Blackstone), David Rubenstein (Carlyle) and Leon Black (Apollo). These four men run the world’s largest private-equity firms.

Billionaires all, they are at or well past the age when CEOs of public companies move on, either by choice or force. Apple, founded the same year as KKR (1976), has had seven bosses; Microsoft, founded the year before, has had three. On average, public companies replace their leaders once or twice a decade. In finance executives begin bowing out in their 40s, flush with wealth and drained by stress.

One thing is clear, the fame of the big names in the industry resides in the US! But Private Equity is not just an American thing. The “Old Continent” defends itself well. The UK leads the table when it comes to PE, placing 7 Firms in the European Top 10.

The current momentum – why does everyone want PE?

Last year was a massive year for private-equity fundraising, and there is little indication that the flow of money into the asset-class will wane any time soon. A staggering 48% of European investors plan to put more money into private equity this year, compared with 2% who plan to trim their allocation, according to a survey published in December by Coller Capital.

“As long as the demand from investors is there, we will see firms looking to raise bigger funds,” she said. “Some private-equity managers will try to raise as much as possible; others will try to remain more disciplined. Some managers, such as Vitruvian Partners and Partners Group, more than doubled their fund size last year.” – Britta Lindhorst, MD at HQ Capital

As of December 2017, there were 1,038 new private-equity funds (less in number but way bigger in size) in the market filled with $415bn of fresh capital (+6.5% vs 2016), compared to 1,324 funds seeking $390 billion a year earlier, according to Preqin. In brief, 2017 was another record-year for PE (i.e 7th year of consecutive growth), the tough times post 2009 financial crisis are long gone.

Reasoning on why PE gained so much attention in the last decades, one thing pops up quite immediately bringing us back to the title of the article: Private Equity is simply the most profitable asset-class of the past 25 years!

Authors

Massimiliano Marchisio

Nikita Kuzmich

Paul Theilig

Felix Schafer

Glossary

AMC = Also called General Partner “GP”, is a financial institution approved and supervised by thelocal authority, whose task it is to manage the fund.

Fund = a fund is a “bucket” filled with investors’ money and managed by the AMC. The amount ofmoney collected can be used to invest into any type of asset

On May 15th, 2017 Atlantia has announced its intention to acquire its Spanish competitor, Abertis.

Atlantia, Italian toll operator whose main asset is Autostrade per l’Italia, the largest concessionaire on the Italian highway network, is a holding company belonging to the Benetton family. Under the management of its CEO, Giovanni Castellucci, former partner at the Boston Consulting Group and manager at Barilla, the company has produced revenues for more than €4 billion and generated a net income of €1.12 billion in 2016. Its assets are strongly exposed to country risk, and an acquisition would be a way to enter new markets and diversify this exposure.

Abertis, headquartered in Barcelona and listed in Madrid, is a leading toll operator as well. Present in 13 countries, with a net profit of €897 million in 2017, a 13% increase from 2016, has appeared as an attractive target for Atlantia’s needs: the new conglomerate, in fact, would be in charge of the management of more than 14,000 km of highways and present in 19 countries.

The Italian company, advised by Mediobanca, Santander and Credit Suisse, has proposed a cash-offer, financed by Bnl-Bnp Paribas, Credit Suisse, Intesa San Paolo and Unicredit[1] valuing the Abertis at €16.50 per share and making up a €16.3 billion deal.

Alternatively, Atlantia has also offered stocks with the aim of making the offer attractive Criteria, unlisted investment bank holding of the Caixa foundation and majority shareholder in Abertis with a 22.3 percent stake, with important investments in the Industrial and the Real Estate sector.
The Italian company would offer unquoted, locked-in stocks, at a fixed conversion rate of 0.697 Atlantia’s share per Abertis share[2], for up to the 23.2 percent of the total offer. This would value the Spanish operator at €17.34 per share; considering the latest trading price at €16.38[3], it represents a generous upside for the shareholders with a premium of around 6%.

This share-swap offer is not appealing for all of Abertis’ stakeholders. Instead, it is a strategic move to win the favor of Criteria, a strategic investor with long-term objectives: in facts, not only the holding keeps its current claims on dividends, projected to increase, but also acquires the right to appoint up to three directors in the Atlantia’s Board, whose size therefore increases from 15 to 18 members[4].

Should this scenario concretize, Edizione, the investment vehicle of the Benetton Family, would suffer a 5 percent dilution in Atlantia, with its stake diminishing from 30 to 25 percent, while Criteria would earn a 15 percent stake. Castellucci has stressed that the combined groups’ strongly performing Latin American assets would be transferred to Abertis, which would maintain its headquarters in Barcelona and would keep trading in Madrid[5].

According to the Spanish Financial Authority, the CNMV, on October 19th Abertis should have formally responded to Atlantia’s offer. Therefore, the bid carried forward by Hochtief, a German leading construction company operating worldwide, with important assets in the US and Australia and, controlled by the Spanish ACS[6], has been a surprise. Hochtief is offering €18.76 per share in cash, attributing to the target a value of €18,6 billion. Alternatively, Abertis investors may opt for a stock-swap option, the conversion rate being 0.1281 per newly issued Hochtief share. Should the Spanish constructor accept this offer, it would add more than 8000 km to the construction business of the German company and ACS, opening up the possibility to extend their operations in Brazil. Advised by J.P. Morgan, Lazard and Key Capital Partners, ACS and Hochtief are now tempting the investors with the promise of high dividends – the combined entity, whose stocks are intended to be traded in Frankfurt, is expected to generate revenues for €24.8 billion and has announced a retention ratio of 10 percent, meaning that roughly 90 percent of its profits would be paid out. Instead, some of the Abertis’ assets would be sold, among which shares in Cellnex Telecom SA and Hispasat SA.

The results of the takeover would be a decrease of ACS’s share in Hochtief, from 72 to less than 50 percent. This would cancel the leverage of the €12 billion net debt, contracted by its investment vehicle, to fund the cash payment, and would leave the company with a stronger position in the resulting entity8.

While Catellucci is considering raising its offer, that could be raised up to €19 per share according to some analysts5, and entering a bidding war, it also has to face a strong opposition by the Spanish government, which is concerned about the loss of the strategic assets owned by Abertis, and wants to prevent the company from falling under foreign ownership. In addition, in case of approval of the second offer by the CNMV, the Spanish Financial Authority, the government may still appeal to the administrative tribunal and cause severe delays in the execution process. The Hochtief offer, that would bring Abertis under the ownership and control of the ACS’ president, Florentino Perez, has encountered a much lower opposition, as the strategic assets owned by Abertis would remain under Spanish ownership. These governmental activities are not unusual: for example, in July 2017 the Macron government had decided to block the offer of Fincantieri and nationalize the building sites in Saint-Nazaire, considered of strategic importance for France, given the unique know-how of the employees, as reported by the French government’s spokesman Castaner[7]. Nevertheless, it is worth noting that such practices seriously harm free market competition and should be limited. Indeed, the issue of governmental interference in public utility companies has been long debated: a recurrent, and sometimes a bit abused, practice is the so-called Golden Share, which allows governments to acquire shares of capital and to appoint members in the Board of Directors of strategic companies and consequently to have a high influence on the decisions taken. This privilege has been, in some cases, sanctioned by the European Court of Justice as dangerous for the markets’ competitive functioning.

Financial markets have responded to the bids’ announcements. While Atlantia lost 1.2 percent, Abertis has been traded at a premium on the bid of the Italian company. The bullish trend has been followed also by ACS and Hochtief, which have gained 5.6 and 1 percent, respectively.[8]

In the end, Abertis seems to be the company benefiting the least from the deal: in fact, it is already well-diversified in terms of EBITDA sources. Additionally, the deal with ACS may be dangerous for Abertis’ creditors in terms of the exposure to the cash-flow volatility of the bidder.
Instead, Atlantia, whose main assets are located in the home market, could diversify its country risk away penetrating in Latin America. Furthermore, despite the poor synergies, it could benefit from an appealingly low acquisition premium embedded in its first offer and, in addition, may increase its cash-flows by building up scale. However, despite the higher acquisition premium of the eventual second offer these benefits would decrease, the Italian group would still enjoy substantial advantages.

With the recent approval of the second offer by the Spanish government, declared at the end of January, the two bidders are now free to compete. In the next 15 days the two companies will have to improve their bids, according to the Cnmv regulation, and then will submit their final offers.

What it is going to happen is still uncertain, but it is possible to see some general drivers in the wave of recent European deals. Low cost of financing, need of consolidation, low opportunities for organic growth are all factors that make M&A extremely attractive for European top players willing to compete in a global field. Just think about the deals between Johnson&Johnson and Actelion, Essilor and Luxottica, Mead Johnson Nutrition and Reckitt Benckiser, Toshiba and Consortium and Vodafone and Idea cellular. These are all examples of the cross-border trend of M&A in Europe, where external growth tends to be preferred more and more to internal expansion[9].

The beginning of 2018 saw another example of the psychological impact of the Bitcoin, Cryptocurrencies, ICO’s and Blockchain on human beings in this period.

In fact, Kodak company, the pioneer in the photography sector announced the Initial Coin Offering (ICO) of KODAKCOIN, to enable photographer to get more protection for the image rights. As a result, the stock soared by more than 400% just after the news.

Kodak was not a darling of Wall Street nor a Company on the headlines of newspapers for innovative initiative, so how can the offering of a digital coin make everyone change idea?

What is a Coin, how is it traded and what are the risks involved? The following addresses those questions and provides an objective framework on the topic, analysing and confronting IPOs with ICOs.

IPO: Initial Public Offering

An IPO, or Initial Public Offering, is the first sale of stock issued by a company to the public. Before it, the public is unable to invest in it, so the company is considered private and involves a relative small number of shareholders in the business. IPOs are the main way to go to widen the range of potential investors from founders, friends and venture capitalists to any individual or institutional investor.

Large firms use this process to raise a great deal of money, allowing the company to grow, expanding their market share and revenues. Private companies have many options to raise capital, such as borrowing, finding additional private investors, or being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors.

Obviously, this process has some pros such as the lower cost of capital, the increase in company’s public image, and it finally allows the attraction and retention of the best management. But, as everything, it has also negative aspects as the company is then required to disclose financial, accounting, tax, and other business information so making public and possibly disseminate that information, which can eventually lead to an increase in the risk of legal or regulatory issues and finally requires more time for reporting.

In this process, the prospectus is essential. It is a formal legal document that is required by and filed with the Securities and Exchange Commission that provides details about an IPO. It is issued in order to inform investors about the risks involved with investing in this stock. The information also guards the issuing company against claims that pertinent information was not fully detailed before the investor put money into a security.

In an IPO, we can have two types of investors, the institutional and the retail; the qualified one acting on behalf of an institution such as pension funds, endowment funds, insurance companies, commercial banks, mutual funds and hedge funds. Alternatively, it can be a retail investor and so also individuals. The main difference between those two categories is that, differently from the institutions which can buy shares on the primary market, the retail cannot participate the IPO and can buy the new shares once they are on the secondary market. As a result, some investors are kind of discriminated.

Once the IPO is completed, investors who bought the shares become shareholders, so they are then interested in the risks incurred by the company and the return they can achieve with their investment. Here after you can see the IPOs occurred in 2017 worldwide, but pay attention that this year this market soared compared to the average trend observed in the past years, not in the number but in the average funds raised, passing from 100 million $ in 2014, 94 in 2015 and 95 in 2016 compared to 120 million $ average in 2017, similar to pre crisis level.

When looking at the returns, investors need to consider both the capital gains, that is an increase in the value of a capital asset that gives it a higher worth than the purchase price and it is not realized until the asset is sold, and the dividend, a distribution of a portion of company’s earnings under the forms of cash, shares or other possible decided by the board of directors.

ICO: Initial Coin Offering

Looking now at the ICOs we can notice a completely different process from the IPOs. In fact, the ICO, the abbreviation of Initial Coin Offering, means that someone offers investors units of a new cryptocurrency or crypto-token in exchange of already existing cryptos like Bitcoin or Ethereum. The underlying technology called Blockchain is about solving problems of traditional money (corruptible, politically biased and opaque). It works with a distributed, cryptographically secured and transparent database. The pros it offers are no central authority in charge of trust, lower transaction costs, an ecosystem simplification, faster transactions, durable and reliable data with process integrity.

The token itself offers the holder access to any platform or service that the developers create in the future with the token. However, as the majority of projects are in development stage, the main scope for holding the token is to speculate on the adoption and the eventual real-world usage of those systems. The benefits of such speculation are the creation of liquidity which enables developers to fund their project and bring it to fruition. The duration of an ICO can be quantified in days or weeks, as opposed to the long time needed in IPOs. Coins and tokens can then be traded on unregulated crypto-exchanges like Poloniex, GDAX or Kraken.

In 2017, there have been 92 ICOs which collectively have raised $3 billion. The following chart is about the ICO market from January to October 2017, showing the amount in million Dollars raised in each month by this process.

Just to give you an idea of the situation of last year, here are some of the most successful and so probably followed ICOs of 2017.

The equivalent for the IPO’s prospectus is the white paper in the ICO, a document explaining in detail the pitch of the future company and platform, describing the technology behind the proposal itself.

It details the commercial, technological and financial figures of a new coin offering and puts it into digestible chunks that the reader can understand.

The majority of ICOs are projects in a very early stage of development and are more similar to ideas or prototypes rather than real businesses.

There is no universally accepted mechanism for the ICO and every company may sell anything they want. Usually, they sell the following: the right of ownership to a certain part of the company’s intellectual property, the right to a percentage of the company’s revenue (dividends), the right of ownership to an internal resource (ex. Virtual values) or something else.

Finally, it is specified which electronic platforms/exchanges/systems are actually ready to exchange company tokens for electronic money. The reputation of each exchange can be used to assume the reliability of each ICO.

The value of coins or tokens lays in potential market and network effect, a phenomenon whereby a good or service becomes more valuable when more people use it. The number of users required for significant network effects is often referred to as critical mass. After the critical mass is attained, the good or service should be able to obtain many new users since its network offers utility. The expected returns can be extremely higher than those in the stock market. As users are also investors, they are more willing to spread the word and encourage the use of the service.

As recognized by the Financial Conduct Authority regulators, ICO participants face abnormal risks as a consequence of being an unregulated space such as the inexistent investor protection from fraud or misleading information and the price volatility of the token.

To sum up, this little table can help better understand the similarities and differences of those two processes.